METHODS & TOOLS OF FINANCIAL MANAGEMENT

As already stated the functions of financial management include financing, investment and dividend policy decisions, etc. The finance manager uses various methods and techniques in the discharge of these functions.

In the area of financing there are various methods to procure funds. Funds may be obtained from long term sources as well as from short term sources. Long term funds may be made available by owners, i.e., shareholders, lenders by issuing debentures, from financial institutions, banks and public at large. Short term funds may be procured from commercial banks, suppliers of goods, public deposits, etc. The finance manager has to decide an optimum capital structure with a view to maximize shareholder’s wealth. He follows various methods in designing a capital structure that can contribute to the maximization of shareholder’s wealth. Financial leverage or trading on equity is an important method by which a finance manager may increase the return to common shareholders.

For evaluating capital expenditure projects (investment decisions), a finance manager uses various methods of capital budgeting viz. average rate of return, payback, internal rate of return, net present value of profitability index. In the area of current assets management, there are various methods for efficient utilization of current resources at the disposal of the firm. A firm can increase its profitability without affecting its liquidity by an efficient management of working capital. For example, in the area of working capital management, cash management may be centralized or decentralized. The centralized method of cash management is considered a better method of managing liquid resources of the firm. In the area of dividend decisions, a firm is faced with the problem of declaring dividend or postponing dividend declaration, a problem of internal financing. For the evaluation of a firm’s performance also there are different methods. For example, ratio analysis is a popular technique to evaluate different aspects of a firm. This technique is very widely used by all the concerned persons. Different ratios serves different objectives. An investor takes help of various ratios to know whether investment in a particular company will be a profitable proposition or not. These ratios enable him to judge the profitability, solvency, liquidity and growth aspects of the firm. A short term creditor is more interested in the liquidity aspect of the firm. This is also possible by studying liquidity ratios-current ratios, quick ratio, etc. The main concern of a finance manager is to provide adequate funds from the best possible source, at the right time and at the minimum cost and to ensure that the funds so acquired are put to the best possible use. He uses various methods/techniques to determine that funds have been procured from the best possible available sources and the funds so acquired have been used in the best possible way. Funds flow and cash flow statements and projected financial statements help a lot in this regard.

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